RESMED INC - Quarter Report: 2017 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

______________________________________________________________________________________________



FORM 10-Q

 

______________________________________________________________________________________________

(Mark One)



For the quarterly period ended December 31, 2017

 



For the transition period from              to             



Commission File Number: 001-15317

 



______________________________________________________________________________________________



ResMed Inc.

(Exact name of registrant as specified in its charter)

 



______________________________________________________________________________________________



Delaware

(State or other jurisdiction of incorporation or organization)

98-0152841

(I.R.S. Employer Identification No.)



9001 Spectrum Center Blvd.

San Diego, CA 92123

United States of America

(Address of principal executive offices)



(858) 836-5000

(Registrant’s telephone number, including area code)

 



______________________________________________________________________________________________



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    

Yes  ☒    No  ☐



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes  ☐    No   ☐



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No   ☒



At January 17, 2018, there were 142,927,127 shares of Common Stock ($0.004 par value) outstanding.  This number excludes 41,186,234 shares held by the registrant as treasury shares.



 

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RESMED INC. AND SUBSIDIARIES



Index



 



 

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Item 1.  Financial Statements

RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(In US$ thousands, except share and per share data)



 



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RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)

(In US$ thousands, except per share data)



 

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RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In US$ thousands)





 

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RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In US$ thousands)

 



 

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(1)      Summary of Significant Accounting Policies



Organization and Basis of Presentation



ResMed Inc. (referred to herein as “we”, “us”, “our” or the “Company”) is a Delaware corporation formed in March 1994 as a holding company for the ResMed Group.  Through our subsidiaries, we design, manufacture and market equipment for the diagnosis and treatment of sleep-disordered breathing and other respiratory disorders, including obstructive sleep apnea.  Our manufacturing operations are located in Australia, Singapore, Malaysia, France, China and the United States.  Major distribution and sales sites are located in the United States, Germany, France, the United Kingdom, Switzerland, Australia, Japan, China, Norway and Sweden.



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and the rules of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all necessary adjustments, which consisted only of normal recurring items, have been included in the accompanying financial statements to present fairly the results of the interim periods.  The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending June 30, 2018.



The condensed consolidated financial statements for the three and six months ended December 31, 2017 and December 31, 2016 are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended June 30, 2017.



Revenue Recognition



We generally record revenue on product sales at the time of shipment, which is when title transfers to the customer. We do not record revenue on product sales which require customer acceptance until we receive acceptance. We initially defer service revenue received in advance from service contracts and recognize that deferred revenue ratably over the life of the service contract. We initially defer revenue we receive in advance from rental unit contracts and recognize that deferred revenue ratably over the life of the rental contract. Otherwise, we recognize revenue from rental unit contracts ratably over the life of the rental contract. We include in revenue freight charges we bill to customers. We charge all freight-related expenses to cost of sales.  Taxes assessed by government authorities that are imposed on and concurrent with revenue-producing transactions, such as sales and value added taxes, are excluded from revenue.



We do not recognize revenues to the extent that we offer a right of return or other recourse with respect to the sale of our products, other than returns for product defects or other warranty claims, nor do we recognize revenues if we offer variable sale prices for subsequent events or activities. However, as part of our sales processes, we may provide upfront discounts for large orders, one-time special pricing to support new product introductions, sales rebates for centralized purchasing entities or price-breaks for regular order volumes. We record the costs of all such programs as an adjustment to revenue at the time the related revenue is recognized. Our products are predominantly therapy-based equipment and require no installation. Therefore, we have no installation obligations. For multiple-element arrangements, we allocate arrangement consideration to the deliverables by use of the relative selling price method. The selling price used for each deliverable is based on vendor–specific objective evidence.



We also generate revenue from time-based licensing of our software and associated services. In most instances, revenue is generated under sales agreements with multiple elements comprising subscription fees and professional services, which typically have contract terms of one to three years.  We evaluate each element in these multiple-element arrangements to determine whether they represent a separate unit of accounting and recognize each element as the services are performed.



Provision for Warranty



We provide for the estimated cost of product warranties at the time the related revenue is recognized. We determine the amount of this provision by using a financial model, which takes into consideration actual historical expenses and potential risks associated with our different products. We use this financial model to calculate the future probable expenses related to warranty and the required level of the warranty provision. Although we engage in product improvement programs and processes, our warranty obligation is affected by product failure rates and costs incurred to correct those product failures. Should actual product failure rates or estimated costs to repair those product failures differ from our estimates, we would be required to revise our estimated warranty provision.



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New Accounting Pronouncements



(a)  Recently issued accounting standards not yet adopted



ASU No. 2014-09, “Revenue from Contracts with Customers”

In May, 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”), ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Since its initial release, the FASB has issued several amendments to the standard, which include clarification of accounting guidance related to identification of performance obligations, intellectual property licenses, and principal vs. agent considerations. ASU 2014-09 and all subsequent amendments (collectively, the “new revenue recognition standards”) will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The guidance also requires improved disclosures on the nature, amount, timing, and uncertainty of revenue that is recognized.



We formed an implementation team in fiscal year June 30, 2017 to oversee adoption of the new revenue recognition standards. The implementation team completed the diagnostic phase of its project which has included assessing the composition and detailed review of our contract portfolio and selection of sample contracts for assessment. There are a number of steps in the team’s project plan that remain to be completed including: finalizing contract reviews, evaluating the impact, and working through required changes to systems, business processes and controls to support the adoption of the new revenue recognition standards. We expect there will be changes to our accounting policies to align with terminology and concepts in the new revenue recognition standards as well as increased disclosures relating to our revenue streams, contract-related balances and contract details.



The new revenue recognition standard is effective for us beginning in the first quarter of the fiscal year ending June 30, 2019 and early application is permitted for annual or interim periods beginning after December 15, 2016. The new guidance can be applied retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of the change recognized at the date of the initial application. Assuming the impact is not material, we expect to adopt the new revenue recognition standards using the modified retrospective method with an adjustment to beginning retained earnings for the cumulative effect of the change.



ASU No. 2016-01, "Financial Instruments - Overall"

In January 2016, the FASB issued Accounting Standards Update ASU No. 2016-01, "Financial Instruments - Overall" (Topic 825-10). The amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, and require equity securities to be measured at fair value with changes in fair value recognized through net income. The amendments also simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment for impairment quarterly at each reporting period. The amendments in ASU 2016-01 will be effective for our first quarter of the fiscal year ending June 30, 2019. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with prospective adoption of the amendments related to equity securities without readily determinable fair values existing as of the date of adoption. We are currently assessing the impact as this standard will be relevant for our Cost-Method Investments.



ASU No. 2016-02, “Leases”

In February 2016, the FASB issued Accounting Standard Update ASU No. 2016-02, “Leases” (Topic 842). Under the new guidance, lessees are required to recognize a right-of-use asset and a lease liability on the balance sheet for all leases, other than those that meet the definition of a short-term lease. This update will establish a lease asset and lease liability by lessees for those leases classified as operating under current GAAP. Leases will be classified as either operating or finance under the new guidance. Operating leases will result in straight-line expense in the income statement, similar to current operating leases, and finance leases will result in more expense being recognized in the earlier years of the lease term, similar to current capital leases.  For lessors, the update will more closely align lease accounting to comparable guidance in the new revenue standards described.



The new standard is effective for us beginning in the first quarter of the fiscal year ending June 30, 2020 and early application is permitted. ASU 2016-02 will be adopted on a modified retrospective transition basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the impact of this standard on our consolidated financial statements and expect to commence an implementation project during the fiscal year ending June 30, 2018. While the formal impact assessment has not commenced, we expect this amendment will affect the way we account for operating leases where we are the lessee (as described above), require reassessment of how we account for revenue where we are the lessor and will result in increased disclosures for all lease arrangements.



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ASU No. 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory”

In October 2016, the FASB issued Accounting Standard Update ASU No. 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory” (Topic 740). Under the new guidance, an entity is required to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. ASU 2016-16 will be effective for the first quarter of our fiscal year ending June 30, 2019. If we enter into transactions within the scope of the standard, it could result in additional deferred tax balances being recognized at the time of the transfer.



(b)  Recently adopted accounting pronouncements



We have not adopted any new accounting pronouncements during the six months ended December 31, 2017.

 

(2)      Inventories



Inventories were comprised of the following at December 31, 2017 and June 30, 2017 (in thousands):

 

(3)      Property, Plant and Equipment



Property, plant and equipment were comprised of the following as of December 31, 2017 and June 30, 2017 (in thousands): 

 

(4)      Goodwill

Changes in the carrying amount of goodwill for six months ended December 31, 2017, and December 31, 2016,  were as follows (in thousands):

 

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(5)      Other Intangible Assets 

Other intangible assets were comprised of the following as of December 31, 2017 and June 30, 2017 (in thousands):





Intangible assets consist of developed/core product technology, trade names, non-compete agreements, customer relationships, and patents, which we amortize over the estimated useful life of the assets, generally between two and fifteen years. There are no expected residual values related to these intangible assets. In-process research and development is amortized over the estimated useful life of the assets, once the research and development efforts are completed. At least on an annual basis, we evaluate the in-process research and development balances for impairment.

 

(6)      Cost-Method Investments



The aggregate carrying amount of our cost-method investments at December 31, 2017 and June 30, 2017, was $39.8 million and $38.3 million, respectively, and is included in the non-current balance of other assets on the condensed consolidated balance sheets. 



We periodically evaluate the carrying value of our cost-method investments, when events and circumstances indicate that the carrying amount of an asset may not be recovered.  We estimate the fair value of our cost-method investments to assess whether impairment losses shall be recorded using Level 3 inputs. These investments include our holdings in privately held service and research companies that are not exchange traded and therefore not supported with observable market prices. However, these investments are valued by reference to their net asset values that can be market supported and unobservable inputs including future cash flows. During the six months ended December 31, 2017 and 2016, we recognized $2.3 million and $0.2 million, respectively, of impairment losses related to our cost-method investments. We have determined, after the impairment charge, that the fair value of our remaining investments exceed their carrying values.



The following table shows a reconciliation of the changes in our cost-method investments during the six months ended December 31, 2017 and December 31, 2016  (in thousands):

 

(7)      Income Taxes



In accordance with ASC 740 Income Taxes, each interim reporting period is considered integral to the annual period, and tax expense is measured using an estimated annual effective tax rate. An entity is required to record income tax expense each quarter based on its annual effective tax rate estimated for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis, adjusted for discrete taxable events that occur during the interim period.



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Our income tax returns are based on calculations and assumptions subject to audit by various tax authorities. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws.  We regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. Any final assessment resulting from tax audits may result in material changes to our past or future taxable income, tax payable or deferred tax assets, and may require us to pay penalties and interest that could materially adversely affect our financial results. 



We are currently under audit by the Australian Taxation Office (“ATO”) for the tax years 2009 to 2013. In December 2017, we received a Statement of Audit Position from the ATO which provides the ATO auditor’s position on the factual and technical issues under audit, and included proposed adjustments totaling approximately $150.0 million in additional tax. The audit is ongoing and we have not received a Notice of Amended Assessment. We do not agree with the ATO’s position and continue to believe we are more likely than not to be successful in defending our position, and therefore have not recognized any additional tax liabilities in relation to this audit. We will pursue all administrative and legal steps in defense of our position; however, if we are not successful in defending our position, the outcome may materially adversely affect our financial results. 



Our income tax expense, short-term income taxes payable and long-term income taxes payable were impacted by charges associated with the Tax Cuts and Jobs Act (“U.S. legislation”) enacted on December 22, 2017, which resulted in additional income tax expense of $126.6 million. Specifically, the income tax expense includes both the transition tax imposed on our accumulated foreign earnings, which resulted in additional income tax expense of $119.9 million, and the write down in the carrying value of our net deferred tax assets due to the lower corporate tax rate, which resulted in additional income tax expense of $6.7 million.



On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, the additional estimated income tax of $126.6 million represents our best estimate based on interpretation of the U.S. legislation as we are still accumulating data to finalize the underlying calculations, or in certain cases, the U.S. Treasury is expected to issue further guidance on the application of certain provisions of the U.S. legislation. In accordance with SAB 118, the additional estimated income tax of $126.6 million is considered provisional and will be finalized before December 22, 2018.

 

(8)      Product Warranties



Changes in the liability for warranty costs, which is included in accrued expenses in our condensed consolidated balance sheets, for the six months ended December 31, 2017 and December 31, 2016,  are as follows (in thousands):



 

(9)        Debt

Debt at December 31, 2017 and June 30, 2017 consisted of the following (in thousands):



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Credit Facility



On October 31, 2013, we entered into a revolving credit agreement, as borrower, with lenders, including Union Bank, N.A., as administrative agent, joint lead arranger, swing line lender and letters of credit issuer, and HSBC Bank USA, National Association, as syndication agent and joint lead arranger, providing for a revolving credit facility of $700.0 million, with an uncommitted option to increase the revolving credit facility by an additional $300.0 million. On April 4, 2016, in connection with our acquisition of Brightree LLC (“Brightree”), we entered into a first amendment to the revolving credit agreement to increase the size of the revolving credit facility from $700.0 million to $1.0 billion, with an uncommitted option to increase the revolving credit facility by an additional $300.0 million, and to make other modifications to provide for the acquisition of Brightree. On January 9, 2017, we entered into a second amendment to our agreement with our existing lenders, including MUFG Union Bank, N.A. as successor in interest to Union Bank, N.A., as Administrative Agent, Joint Lead Arranger, Swing Line Lender and L/C Issuer; and HSBC Bank USA, National Association, as Syndication Agent and Joint Lead Arranger. The second amendment, among other things, increased the size of our senior unsecured revolving credit facility from $1.0 billion to $1.3 billion, with an uncommitted option to increase the revolving credit facility by an additional $300.0 million. The credit facility terminates on October 31, 2018, when all unpaid principal and interest under the loans must be repaid. The outstanding principal amount due under the credit facility bears interest at a rate equal to LIBOR plus 1.0% to 2.0% (depending on the then-applicable leverage ratio). At December 31, 2017, the interest rate that was being charged on the outstanding principal amount was 2.8%.  A commitment fee of 0.15% to 0.25% (depending on the then-applicable leverage ratio) applies on the unused portion of the credit facility. The credit facility also includes a $25.0 million sublimit for letters of credit.



Our obligations under the revolving credit agreement are unsecured but are guaranteed by certain of our direct and indirect U. S. subsidiaries, including ResMed Corp., ResMed Motor Technologies Inc., Birdie Inc., Inova Labs, Inc., Brightree, Brightree Services LLC, Brightree Home Health & Hospice LLC and Strategic AR LLC, under an unconditional guaranty. The credit agreement contains customary covenants, including certain financial covenants and an obligation that we maintain certain financial ratios, including a maximum leverage ratio of funded debt to EBITDA (as defined in the credit agreement) and an interest coverage ratio.



At December 31, 2017, there was $1,020.0 million outstanding under the revolving credit facility. 

 

(10)    Stockholders’ Equity



Common Stock.    During the six months ended December 31, 2017, we repurchased 100,000 shares at a cost of $8.5 million.  Since the inception of our share repurchase programs and through December 31, 2017, we have repurchased a total of 41.2 million shares at a cost of $1.5 billion.  Shares that are repurchased are classified as treasury stock pending future use and reduce the number of shares outstanding used in calculating earnings per share. There is no expiration date for this program, and the program may be accelerated, suspended, delayed or discontinued at any time at the discretion of our board of directors. At December 31, 2017, 13.5 million additional shares can be repurchased under the approved share repurchase program.



Preferred Stock.    In April 1997, the board of directors designated 2.0 million shares of our $0.01 par value preferred stock as Series A Junior Participating Preferred Stock. No shares were issued or outstanding at December 31, 2017 and June 30, 2017.



Stock Options and Restricted Stock Units.    We have granted stock options and restricted stock units to personnel, including officers and directors, in accordance with the amended and restated ResMed Inc. 2009 Incentive Award Plan (as amended and restated the “2009 Plan”).  The options have expiration dates of seven years from the date of grant and the options and restricted stock units vest over one to four years.



At the annual meeting of our stockholders in November 2017, our stockholders approved an amendment and restatement to the 2009 Plan to increase the number of shares of common stock that may be issued or transferred pursuant to awards under the 2009 Plan by 7.4 million. While these additional shares have been authorized by the stockholders, they are pending registration with the SEC. 



The amendment and restatement imposed a maximum award amount which may be granted under the 2009 Plan to non-employee director in a calendar year, which when taken together with any other cash fees earned for services as a non-employee director during the calendar year, has a total value of $0.7 million, or $1.2 million in the case of a non-employee director who is also serving as chairman of our board of directors. The amendment and restatement also increased the maximum amount payable pursuant to cash-denominated performance awards granted to any US Internal Revenue Code Section 162(m) “covered employee” in any calendar year from $3.0 million to $5.0 million. In addition, the amendment and restatement extended the existing prohibition on the payment of dividends or dividend equivalents on unvested awards to apply to all awards, including time-based restricted stock, deferred stock and stock payment. The term of the 2009 Plan was extended by four years so that the plan expires on September 11, 2027. The amendment became effective on the date of adoption by our board of directors which was September 11, 2017.



At December 31, 2017, the maximum number of shares of our common stock authorized for issuance under the 2009 Plan is 51.1 million shares. The number of securities remaining available for future issuance under the 2009 Plan at December 31, 2017 is 17.6 million. 

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The following table summarizes option activity during the six months ended December 31, 2017:



The following table summarizes the activity of restricted stock units during the six months ended December 31, 2017:



Employee Stock Purchase Plan (the “ESPP”).    Under the ESPP, we offer participants the right to purchase shares of our common stock at a discount during successive offering periods. During the six months ended December 31, 2017 and December 31, 2016, we issued 148,000 and 142,000 shares to our employees associated with the ESPP, respectively. At December 31, 2017, the number of shares remaining available for future issuance under the ESPP is 0.7 million shares.

 

(11)    Earnings Per Share



Basic earnings per share is computed by dividing the net income available to common stockholders by the weighted average number of shares of common stock outstanding. For purposes of calculating diluted earnings per share, the denominator includes both the weighted average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options and restricted stock units.



Stock options and restricted stock units of 126,390 and 410,520 for the three months ended December 31, 2017 and December 31, 2016, respectively, and stock options and restricted stock units of 159,603 and 337,487 for the six months ended December 31, 2017 and December 31, 2016, respectively, were not included in the computation of diluted earnings per share as the effect would have been anti-dilutive.



Basic and diluted earnings per share for the three and six months ended December 31, 2017 and December 31, 2016 are calculated as follows (in thousands except per share data):

 

(12)    Fair Value Measurements



In determining the fair value measurements of our financial assets and liabilities, we consider the principal and most advantageous market in which we transact and consider assumptions that market participants would use when pricing the financial asset or liability. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.



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The hierarchies of inputs are as follows:





The following table summarizes our financial assets and liabilities, at December 31, 2017 and June 30, 2017, using the valuation input hierarchy (in thousands):





We determine the fair value of our financial assets and liabilities as follows:



Foreign currency hedging instruments – These financial instruments are valued using third-party valuation models based on market observable inputs, including interest rate curves, on-market spot currency prices, volatilities and credit risk.



Contingent consideration – These liabilities include the fair value estimates of additional future payments that may be required for some of our previous business acquisitions based on the achievement of certain performance milestones.  Each potential future payment is valued using the estimated probability of achieving each milestone, which is then discounted to present value.



The following is a reconciliation of changes in the fair value of contingent consideration for the six months ended December 31, 2017 and December 31, 2016 (in thousands):





We did not have any significant non-financial assets or liabilities measured at fair value on December 31, 2017 or June 30, 2017.

 

(13)    Legal Actions and Contingencies



Litigation

 

In the normal course of business, we are subject to routine litigation incidental to our business.  While the results of this litigation cannot be predicted with certainty, we believe that their final outcome will not, individually or in aggregate, have a material adverse effect on our consolidated financial statements taken as a whole.



Contingent Obligations Under Recourse Provisions



We use independent leasing companies to offer financing to some of our customers for the purchase of some of our products. Under these arrangements, if the customer qualifies under the leasing company’s credit criteria and finances the transaction, the customers repay the leasing company on a fixed payment plan. For some of these arrangements, the customer’s receivable balance is with recourse, either limited or full, whereby we are responsible for repaying the leasing company should the customer default. We record the outstanding amount of receivables with full recourse in accrued expenses, which is offset by an equivalent amount recorded in accounts receivable. Additionally, we record a contingent provision for doubtful accounts for expected customer defaults based on historical default rates and any specific customer accounts with collection issues.



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The following table summarizes the amount of receivables sold with recourse during the six months ended December 31, 2017 and December 31, 2016 (in thousands):







The following table summarizes the maximum exposure on outstanding receivables sold with recourse and provision for doubtful accounts at December 31, 2017 and June 30, 2017 (in thousands):





 

(14)    Derivative Instruments and Hedging Activities



We transact business in various foreign currencies, including a number of major European currencies as well as the Australian and Singapore dollars. We have significant foreign currency exposure through both our Australian and Singapore manufacturing activities, and international sales operations.  We have established a foreign currency hedging program using purchased currency options and forward contracts to hedge foreign-currency-denominated financial assets, liabilities and manufacturing cash flows.  The terms of such foreign currency hedging contracts generally do not exceed three years.  The goal of this hedging program is to economically manage the financial impact of foreign currency exposures denominated mainly in Euros, and Australian and Singapore dollars.  Under this program, increases or decreases in our foreign currency denominated financial assets, liabilities, and firm commitments are partially offset by gains and losses on the hedging instruments.

 

We do not designate these foreign currency contracts as hedges.  We have determined our hedge program to be a non-effective hedge as defined under the FASB issued authoritative guidance. All movements in the fair value of the foreign currency instruments are recorded within other income, net in our condensed consolidated statements of income.  We do not enter into financial instruments for trading or speculative purposes.



We held foreign currency instruments with notional amounts totaling $789.3 million and $568.2 million at December 31, 2017 and June 30, 2017, respectively, to hedge foreign currency fluctuations.  These contracts mature at various dates prior to December 31, 2019. 



The following table summarizes the amount and location of our derivative financial instruments as of December 31, 2017 and June 30, 2017 (in thousands):



The following table summarizes the amount and location of gains (losses) associated with our derivative financial instruments for the six months ended December 31, 2017 and December 31, 2016, respectively (in thousands):



We are exposed to credit-related losses in the event of non-performance by counter parties to financial instruments.  We minimize counterparty credit risk by entering into derivative transactions with major financial institutions and we do not expect material losses as a result of default by our counterparties.  



 

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Special Note Regarding Forward-Looking Statements



This report contains or may contain certain forward-looking statements and information that are based on the beliefs of our management as well as estimates and assumptions made by, and information currently available to, our management. All statements other than statements regarding historical facts are forward-looking statements. The words “believe,” “expect,” “intend,” “anticipate,” “will continue,” “will,” “estimate,” “plan,” “future” and other similar expressions, and negative statements of such expressions, generally identify forward-looking statements, including, in particular, statements regarding the development and approval of new products and product applications, market expansion, pending litigation, pending or consummated acquisitions and the development of new markets for our products, such as cardiovascular and stroke markets.  These forward-looking statements are made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  You are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements reflect the views of our management at the time the statements are made and are subject to a number of risks, uncertainties, estimates and assumptions, including, without limitation, and in addition to those identified in the text surrounding such statements, those identified in our annual report on Form 10-K for the fiscal year ended June 30, 2017 and elsewhere in this report. 



In addition, important factors to consider in evaluating such forward-looking statements include changes or developments in healthcare reform, social, economic, market, legal or regulatory circumstances, changes in our business or growth strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors, the actions or omissions of third parties, including suppliers, customers, competitors and governmental authorities and various other factors. If any one or more of these risks or uncertainties materialize, or underlying estimates or assumptions prove incorrect, actual results may vary significantly from those expressed in our forward-looking statements, and there can be no assurance that the forward-looking statements contained in this report will in fact occur.



Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described in our annual report on Form 10-K for the fiscal year ended June 30, 2017, in addition to the other cautionary statements and risks described elsewhere in this report and in our other filings with the Securities and Exchange Commission (“SEC”), including our subsequent reports on Forms 10-Q and 8-K.  These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock will likely decline and you may lose all or part of your investment.



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Overview



The following is an overview of our results of operations for the three and six months ended December 31, 2017.  Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of ResMed Inc. Management’s discussion and analysis is provided as a supplement to, and should be read in conjunction with, the condensed consolidated financial statements and notes, included in this report.



We are a global leader in the development, manufacturing, distribution and marketing of medical devices and cloud-based software applications that diagnose, treat and manage respiratory disorders including sleep disordered breathing (“SDB”), chronic obstructive pulmonary disease, neuromuscular disease and other chronic diseases. SDB includes obstructive sleep apnea and other respiratory disorders that occur during sleep. Our products and solutions are designed to improve patient quality of life, reduce the impact of chronic disease and lower healthcare costs as global healthcare systems continue to drive a shift in care from hospitals to the home and lower cost settings. Our cloud-based software digital health applications, along with our devices are designed to provide connected care to improve patient outcomes and efficiencies for our customers.



Since the development of continuous positive airway pressure therapy, we have expanded our business by developing or acquiring a number of products and solutions for a broader range of respiratory disorders including technologies to be applied in medical and consumer products, ventilation devices, diagnostic products, mask systems for use in the hospital and home, headgear and other accessories, dental devices, portable oxygen concentrators and cloud-based software informatics solutions to manage patient outcomes and customer and provider business processes. Our growth has been fueled by geographic expansion, our research and product development efforts, acquisitions and an increasing awareness of SDB and respiratory conditions like chronic obstructive pulmonary disease as significant health concerns.  During the three months ended December 31, 2017, we invested $40.6 million on research and development activities with a continued focus on the development and commercialization of new, innovative products  and solutions that improve patient outcomes, create efficiencies for our customers and help physicians and providers better manage chronic disease and lower healthcare costs.



During the three months ended December 31, 2017, our net revenue increased by 13% compared to the three months ended December 31, 2016.  Gross margin was 58.2% for the three months ended December 31, 2017 compared to 58.3% for the three months ended December 31, 2016.  Diluted earnings per share for the three months ended December 31, 2017 was $0.07 per share, compared to $0.54 per share for the three months ended December 31, 2016. 



At December 31, 2017, our cash and cash equivalents totaled $858.9 million, our total assets were $3.6 billion and our stockholders’ equity was $2.0 billion. 



In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we provide certain financial information on a “constant currency basis”, which is in addition to the actual financial information presented.  In order to calculate our constant currency information, we translate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period.  However, constant currency measures should not be considered in isolation or as an alternative to U.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. GAAP.

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Net Revenue



Net revenue for the three months ended December 31, 2017 increased to $601.3 million from $530.4 million for the three months ended December 31, 2016,  an increase of $70.9 million or 13%  (an 11% increase on a constant currency basis). The increase in net revenue was attributable to an increase in unit sales of our devices, masks and accessories, partially offset by a decline in average selling prices. Movements in international currencies against the U.S. dollar positively impacted net revenues by approximately $14.4 million for the three months ended December 31, 2017. Revenue from Brightree, our software as a service business, for the three months ended December 31, 2017 was $38.7 million, an increase of 14% over the prior year quarter.



Net revenue in U.S., Canada and Latin America, excluding revenue attributable to Brightree, for the three months ended December 31, 2017 increased to $329.2 million from $293.0 million for the three months ended December 31, 2016,  an increase of $36.2 million or 12%.  The increase in net revenue in U.S., Canada and Latin America, excluding revenue attributable to Brightree, is primarily due to an increase in unit sales of our devices, masks and accessories, partially offset by a decline in average selling prices.



Net revenue in combined Europe, Asia and other markets increased for the three months ended December 31, 2017 to $233.4 million from $203.6 million for the three months ended December 31, 2016,  an increase of $29.8 million or 15%  (an 8% increase on a constant currency basis).  The constant currency increase in sales in combined Europe, Asia and other markets predominantly reflects an increase in unit sales of our devices, masks and accessories, partially offset by a decline in average selling prices. 

 

Net revenue from devices for the three months ended December 31, 2017 increased to $337.0 million from $301.0 million for the three months ended December 31, 2017,  an increase of 12%, including an increase of 13% in U.S., Canada and Latin America and an increase of 11% in combined Europe, Asia and other markets  (a 5% increase on a constant currency basis).  Net revenue from masks and other accessories for the three months ended December 31, 2017 increased to $225.6 million from $195.6 million for the three months ended December 31, 2016,  an increase of 15%,  including an increase of 12% in U.S., Canada and Latin America and an increase of 23% in combined Europe, Asia and other markets  (a 16% increase on a constant currency basis). Excluding the impact of foreign currency movements, device sales for the three months ended December 31, 2017 increased by 9%, and masks and accessories sales increased by 13%, compared to the three months ended December 31, 2016. 

 

The following table summarizes the percentage movements in our net revenue, excluding revenue attributable to Brightree, for the three months ended December 31, 2017 compared to the three months ended December 31, 2016:

*Constant currency numbers exclude the impact of movements in international currencies.



Net revenue for the six months ended December 31, 2017, was $1,124.9 million, compared to $995.8 million for the six months ended December 31, 2016,  an increase of 13%. Movements in international currencies against the U.S. dollar positively impacted net revenue by approximately $21.7 million during the six months ended December 31, 2017. Excluding the impact of currency movements, total revenue for the six months ended December 31, 2017 increased by 11% compared to the six months ended December 31, 2016. For the six months ended December 31, 2017, revenue from sales of devices increased by 11% compared to the six months ended December 31, 2016, comprised of an increase of 11% in North and Latin America and an increase of 12% elsewhere (a 7% increase in constant currency terms). For the six months ended December 31, 2017, revenue from masks and other accessories increased by 15% compared to the six months ended December 31, 2016,  comprised of an increase 13% in North and Latin America and a 21% increase elsewhere (a 16% increase in constant currency terms).



The following table summarizes the percentage movements in our net revenue, excluding revenue attributable to Brightree, for the six months ended December 31, 2017 compared to the six months ended December 31, 2016:





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Gross Profit



Gross profit increased for the three months ended December 31, 2017 to $349.8 million from $309.1 million for the three months ended December 31, 2016,  an increase of $40.7 million or 13%.  Gross profit as a percentage of net revenue for the three months ended December 31, 2017 was 58.2% compared to 58.3% for the three months ended December 31, 2016. 



Our gross margin was lower than last year which was primarily due to declines in our average selling prices, partially offset by manufacturing and procurement efficiencies.



Gross profit increased for the six months ended December 31, 2017 to $655.4 million from $578.3 million for the six months ended December 31, 2016,  an increase of $77.1 million or 13%. Gross profit as a percentage of net revenue for the six months ended December 31, 2017 was 58.3% compared to 58.1% for the six months ended December 31, 2016.



The increase in gross margins was primarily due to manufacturing and procurement efficiencies and the prior year expense of $5.0 million associated with the Astral battery field safety notification, partially offset by declines in our average selling prices.



Selling, General and Administrative Expenses



Selling, general and administrative expenses increased for the three months ended December 31, 2017 to $151.8 million from $139.3 million for the three months ended December 31, 2016,  an increase of $12.5 million or 9%.  Selling, general and administrative expenses were unfavorably impacted by the movement of international currencies against the U.S. dollar, which increased our expenses by approximately $4.5 million, as reported in U.S. dollars. Excluding the impact of foreign currency movements, selling, general and administrative expenses for the three months ended December 31, 2017 increased by 6% compared to the three months ended December 31, 2016. Selling, general and administrative expenses, as a percentage of net revenue, were 25.2% for the three months ended December 31, 2017, compared to 26.3% for the three months ended December 31, 2016.  



The constant currency increase in selling, general and administrative expenses was primarily due to additional personnel to support our commercial activities,  partially offset by a decrease in legal expenses.  



Selling, general and administrative expenses increased for the six months ended December 31, 2017 to $295.7 million from $268.2 million for the six months ended December 31, 2016,  an increase of $27.5 million or 10%. The selling, general and administrative expenses were unfavorably impacted by the movement of international currencies against the U.S. dollar, which increased our expenses by approximately $7.1 million, as reported in U.S. dollars. Excluding the impact of foreign currency movements, selling, general and administrative expenses for the six months ended December 31, 2017 increased by 8% compared to the six months ended December 31, 2016.  Selling, general and administrative expenses, as a percentage of net revenue, were 26.3% for the six months ended December 31, 2017, compared to 26.9% for the six months ended December 31, 2016.



The constant currency increase in selling, general and administrative expenses was primarily due to an increase in the number of personnel to support our commercial activities.



Research and Development Expenses



Research and development expenses increased for the three months ended December 31, 2017 to $40.6 million from $38.2 million for the three months ended December 31, 2016,  an increase of $2.5 million, or 6%.  Research and development expenses were unfavorably impacted by the movement of international currencies against the U.S. dollar, which increased our expenses by approximately $1.0 million for the three months ended December 31, 2017, as reported in U.S. dollars.  Excluding the impact of foreign currency movements, research and development expenses increased by 4% compared to the three months ended December 31, 2016. Research and development expenses, as a percentage of net revenue, were 6.8% for the three months ended December 31, 2017, compared to 7.2% for the three months ended December 31, 2016.  



The increase in research and development expenses in constant currency terms was primarily due to an increase in the number of research and development personnel and increases in materials and tooling costs incurred to facilitate development of new products.    



Research and development expenses increased for the six months ended December 31, 2017 to $78.1 million from $72.6 million for the six months ended December 31, 2016,  an increase of $5.4 million or 7%. The research and development expenses were unfavorably impacted by the movement of international currencies against the U.S. dollar, which increased our expenses by approximately $2.0 million for the six months ended December 31, 2017, as reported in U.S. dollars. Excluding the impact of foreign currency movements, our research and development expenses increased by 5% compared to the six months ended December 31, 2016. Research and development expenses, as a percentage of net revenue, were 6.9% for the six months ended December 31, 2017, compared to 7.3% for the six months ended December 31, 2016.



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The increase in research and development expenses in constant currency terms was primarily due to additional expenses associated with the consolidation of recent acquisitions, an increase in the number of research and development personnel and increases in materials and tooling costs incurred to facilitate development of new products.



Amortization of Acquired Intangible Assets    



Amortization of acquired intangible assets for the three months ended December 31, 2017 totaled $11.3 million compared to $11.7 million for the three months ended December 31, 2016.  Amortization of acquired intangible assets for the six months ended December 31, 2017 totaled $23.1 million compared to $23.4 million for the six months ended December 31, 2016. 



Total Other Income (Loss), Net



Total other (loss) income, net for the three months ended December 31, 2017 was a loss of $4.3 million compared to a loss of $0.7 million for the three months ended December 31, 2016.  The loss was predominantly attributable to an increase in interest expense due to higher interest rates on our borrowings, foreign currency losses and impairment losses relating to cost-method investments.



Total other (loss) income, net for the six months ended December 31, 2017 was a loss of $8.3 million compared to a loss of $1.9 million for the six months ended December 31, 2016.  The loss was predominantly attributable to an increase in interest expense due to higher interest rates on our borrowings, foreign currency losses and impairment losses relating to cost-method investments.



Income Taxes



Our effective income tax rate for the three and six months ended December 31, 2017 was 93.3% and 61.8%, respectively, as compared to 20.2% and 19.2% for the three and six months ended December 31, 2016, respectively. 



For the three and six months ended December 31, 2017, our effective tax rate was impacted by charges associated with the Tax Cuts and Jobs Act (“U.S. legislation”) enacted on December 22, 2017, which resulted in additional income tax expense of $126.6 million. Specifically, the effective tax rate includes both the transition tax imposed on our accumulated foreign earnings resulting in additional income tax expense of $119.9 million and the write down in the carrying value of our net deferred tax assets due to the lower corporate tax rate, which resulted in additional income tax expense of $6.7 million.     



On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, the additional estimated income tax of $126.6 million represents our best estimate based on interpretation of the U.S. legislation as we are still accumulating data to finalize the underlying calculations, or in certain cases, the U.S. Treasury is expected to issue further guidance on the application of certain provisions of the U.S. legislation. In accordance with SAB 118, the additional estimated income tax of $126.6 million is considered provisional and will be finalized before December 22, 2018.



Our effective tax rate was impacted by tax benefits related to the vesting or settlement of employee share-based awards, which reduced our income tax expenses by $7.7 million and $9.6 million for the three and six months ended December 31, 2017, respectively, as compared with $Nil and $2.5 million for the three and six months ended December 31, 2016, respectively.



Finally, our effective income tax rate was affected by the geographic mix of our earnings.  Our Singapore and Malaysia operations operate under certain tax holidays and tax incentive programs that will expire in whole or in part at various dates through June 30, 2020.  During the three and six months ended December 31, 2017, as a result of U.S. legislation, we have treated all non-U.S. historical earnings as taxable, which resulted in additional tax expense of $119.9 million. Therefore, future repatriation of cash held by our non-U.S. subsidiaries will generally not be subject to U.S. federal tax if repatriated.



Additionally, we are currently under audit by the Australian Taxation Office (“ATO”) for the tax years 2009 to 2013. In December 2017, we received a Statement of Audit Position from the ATO which provides the ATO auditor’s position on the factual and technical issues under audit, and included proposed adjustments totaling approximately $150.0 million in additional tax. The audit is ongoing and we have not received a Notice of Amended Assessment.  We do not agree with the ATO’s position and continue to believe we are more likely than not to be successful in defending our position, and therefore have not recognized any additional tax liabilities in relation to this audit. We will pursue all administrative and legal steps in defense of our position; however, if we are not successful in defending our position, the outcome may materially adversely affect our financial results.



Net Income and Earnings per Share



As a result of the factors above, our net income for the three months ended December 31, 2017 was $9.5 million compared to net income of $76.7 million for the three months ended December 31, 2016,  a decrease of 88% over the three months ended December 31, 2016. Our net income for the six months ended December 31, 2017 was $95.7 million compared to net income of $152.8 million for the six months ended December 31, 2016,  a decrease of 37% over the six months ended December 31, 2016.  



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Our diluted earnings per share for the three months ended December 31, 2017 were $0.07 per diluted share compared to $0.54 for the three months ended three months ended December 31, 2016.  Our diluted earnings per share for the six months ended December 31, 2017 were $0.67 per diluted share compared to $1.08 for the six months ended December 31, 2016.



Liquidity and Capital Resources



As of December 31, 2017 and June 30, 2017, we had cash and cash equivalents of $858.9 million and $821.9 million, respectively.  Working capital was $397.9 million and $1,283.9 million, at December 31, 2017 and June 30, 2017, respectively. The reduction in working capital is predominantly due to the reclassification of our long-term debt balance of $1,019.1 million to short-term debt as the facility terminates on October 31, 2018. 



As of December 31, 2017 and June 30, 2017, our cash and cash equivalent balances held within the United States amounted to $38.6 million and $23.2 million, respectively. Our remaining cash and cash equivalent balances at December 31, 2017 and June 30, 2017,  were $820.3 million and $798.7 million, respectively. Our cash and cash equivalent balances are held at highly rated financial institutions.    



During the three and six months ended December 31, 2017, as a result of U.S. legislation, we have treated all non-U.S. historical earnings as taxable, which resulted in additional tax expense of $119.9 million which is payable over the next eight years.  Therefore, future repatriation of cash held by our non-U.S. subsidiaries will generally not be subject to U.S. federal tax if repatriated. As we evaluate the impact of U.S. tax legislation and the future cash needs of our global operations, we may revise the amount of foreign earnings considered to be permanently reinvested outside the United States. 



Inventories at December 31, 2017 were $296.1 million,  an increase of $27.7 million or 10% from the June 30, 2017 balance of $268.3 million.  The increase in inventories was required to support our revenue growth and new product introductions.



Accounts receivable at December 31, 2017 were $482.9 million,  an increase of $32.4 million or 7% compared to the June 30, 2017,  balance of $450.5 million.  Accounts receivable days outstanding of 72 days at December 31, 2017,  were higher than the 68 days at June 30, 2017.  Our allowance for doubtful accounts as a percentage of total accounts receivable at December 31, 2017,  was 2.9%, compared to 2.4% at June 30, 2017. 



During the six months ended December 31, 2017, we generated cash of $226.5 million from operations compared to $206.1 million for the six months ended December 31, 2016.  The higher level of cash generated from operations during the six months ended December 31, 2017, was primarily driven by the increase in underlying net income,  when excluding the additional income tax expense of $126.6 million relating to U.S. legislation changes. Movements in foreign currency exchange rates during the six months ended December 31, 2017, had the effect of increasing our cash and cash equivalents by $15.6 million, as reported in U.S. dollars. During the six months ended December 31, 2017, we recommenced our share repurchase program and repurchased 100,000 shares at a cost of $8.5 million. We did not repurchase any shares during the six months ended December 31, 2016.  During the six months ended December 31, 2017 and 2016, we also paid dividends totaling $99.6 million and $92.9 million, respectively.



Capital expenditures for the six months ended December 31, 2017 and 2016, amounted to $32.0 million and $29.2 million, respectively. The capital expenditures for the six months ended December 31, 2017, primarily reflected investment in computer hardware and software, production tooling, equipment and machinery, and rental and loan equipment. At December 31, 2017, our balance sheet reflects net property, plant and equipment of $401.5 million compared to $394.2 million at June 30, 2017. 



Details of contractual obligations at December 31, 2017, are as follows (in thousands):



Details of other commercial commitments at December 31, 2017, are as follows (in thousands):

*The above guarantees mainly relate to requirements under contractual obligations with insurance companies transacting with our German subsidiaries and guarantees provided under our facility leasing obligations.



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Credit Facility



On October 31, 2013, we entered into a revolving credit agreement, as borrower, with lenders, including Union Bank, N.A., as administrative agent, joint lead arranger, swing line lender and letters of credit issuer, and HSBC Bank USA, National Association, as syndication agent and joint lead arranger, providing for a revolving credit facility of $700.0 million, with an uncommitted option to increase the revolving credit facility by an additional $300.0 million. On April 4, 2016, in connection with our acquisition of Brightree LLC (“Brightree”), we entered into a first amendment to the revolving credit agreement to increase the size of the revolving credit facility from $700.0 million to $1.0 billion, with an uncommitted option to increase the revolving credit facility by an additional $300.0 million, and to make other modifications to provide for the acquisition of Brightree. On January 9, 2017, we entered into a second amendment to our agreement with our existing lenders, including MUFG Union Bank, N.A. as successor in interest to Union Bank, N.A., as Administrative Agent, Joint Lead Arranger, Swing Line Lender and L/C Issuer; and HSBC Bank USA, National Association, as Syndication Agent and Joint Lead Arranger. The second amendment, among other things, increased the size of our senior unsecured revolving credit facility from $1.0 billion to $1.3 billion, with an uncommitted option to increase the revolving credit facility by an additional $300.0 million. The credit facility terminates on October 31, 2018, when all unpaid principal and interest under the loans must be repaid. The outstanding principal amount due under the credit facility bears interest at a rate equal to LIBOR plus 1.0% to 2.0% (depending on the then-applicable leverage ratio). At December 31, 2017, the interest rate that was being charged on the outstanding principal amount was 2.8%.  A commitment fee of 0.15% to 0.25% (depending on the then-applicable leverage ratio) applies on the unused portion of the credit facility. The credit facility also includes a $25.0 million sublimit for letters of credit.



Our obligations under the revolving credit agreement (as amended) are unsecured but are guaranteed by certain of our direct and indirect U.S. subsidiaries, including ResMed Corp., ResMed Motor Technologies Inc., Birdie Inc., Inova Labs, Inc., Brightree, Brightree Services LLC, Brightree Home Health & Hospice LLC and Strategic AR LLC, under an unconditional guaranty. The credit agreement contains customary covenants, including certain financial covenants and an obligation that we maintain certain financial ratios, including a maximum leverage ratio of funded debt to EBITDA (as defined in the credit agreement) and an interest coverage ratio. At December 31, 2017, we were in compliance with the debt covenants under the revolving credit agreement and there was $1,020.0 million outstanding under the revolving credit facility.



As a result of the U.S. legislation change, we are assessing our global cash and debt requirements and expect to have new facilities in place by June 30, 2018.  At December 31, 2017, our debt balance, net of cash and cash equivalents, was $160.2 million. We expect to satisfy all of our liquidity and long-term debt requirements through a combination of cash on hand, cash generated from operations and new and existing debt facilities.



Common Stock



During the six months ended December 31, 2017, we repurchased 100,000 million shares at a cost of $8.5 million.  Since the inception of our share repurchase programs and through December 31, 2017, we have repurchased a total of 41.2 million shares at a cost of $1.5 billion. Shares that are repurchased are classified as treasury stock pending future use and reduce the number of shares outstanding used in calculating earnings per share. There is no expiration date for this program, and the program may be accelerated, suspended, delayed or discontinued at any time at the discretion of our board of directors. At December 31, 2017,  13.5 million additional shares can be repurchased under the approved share repurchase program.



Critical Accounting Principles and Estimates



The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.  On an ongoing basis we evaluate our estimates, including those related to allowance for doubtful accounts, inventory reserves, warranty obligations, goodwill, potentially impaired assets, intangible assets, income taxes and contingencies.



We state these accounting policies in the notes to the financial statements and at relevant sections in this discussion and analysis.  The estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances.  Actual results could vary from those estimates under different assumptions or conditions.



For a full discussion of our critical accounting policies, see our Annual Report on Form 10-K for the year ended June 30, 2017. 

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Recently Issued Accounting Pronouncements

 

See note 1 to the unaudited condensed consolidated financial statements for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial positions and cash flows.



Off-Balance Sheet Arrangements



As of December 31, 2017, we are not involved in any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.